Is a 10% consumption tax really to benefit social welfare services?

June 26, 27, 2010

Prime Minister Kan Naoto says that because the government is “ten trillion yen short” of funding social welfare programs, it will be necessary to increase the consumption tax rate to ten percent from the present five percent. Is this really the only option?

To cope with the aging society and increasing poverty, the budget for social security increases every year by one trillion yen. If “covering the shortfall with the consumption tax” goes on, as Kan says, the tax rate will continue to rise.

In the first place, the consumption tax is the most inappropriate resource for social welfare services on the grounds that the regressive tax imposes heavier burdens on lower income earners. It has been 21 years since the consumption tax was introduced. Is there any social welfare program that has improved due to the consumption tax?

If not, where have these tax revenues gone? So far, we have paid a total of 224 trillion yen in consumption taxes. During the same period, the fall in tax revenues due to cuts in three forms of corporate taxes amounted to 208 trillion yen. In short, most of the consumption tax revenues have been used to make up for the loss caused by tax breaks for large corporations.

If the corporate effective tax rate is decreased from the present 40 percent to 25 percent as the DPJ is calling for, Japan’s tax revenues will drop by nine trillion yen. With a 5% increase in the consumption tax, however, tax revenues will increase by 11 trillion yen. What the Kan government is really aiming at is to secure extra revenues to make up for the loss caused by further tax relief measures for large corporations.

Will Japan be like Greece?

PM Kan has no hesitation in stating that Japan will be like Greece unless Japan increases the consumption tax rate now. Is that so?

First of all, Greece and Japan are in completely different situations. In Greece, about 70 percent of government bond holders are foreign investors. The total amount of Greek bonds possessed by foreigners is the same as its GDP. Because of this, the Greek government can no longer handle its own national finance by itself. In Japan, on the other hand, more than 90 percent of government bonds are bought with domestic funds. The percentage of the Japanese government bonds held by foreigners is less than ten percent of Japan’s GDP. Of course, if Japan leaves the ballooning government debt as it is, it may someday have to rely on foreign money. To prevent such a future from becoming a reality, the need is for the government to curb the rise in the debt in a rational manner.

Because of fiscal deficits?

At first, it is necessary to look into the cause of the massive fiscal deficits. In the 1990s, Japan promised the United States to introduce 630 trillion yen worth of large development projects and continued implementing wasteful public works projects. The government also increased its military spending to five trillion yen and provided the largest-ever amount of budgeting for U.S. forces to stay in Japan, the so-called “sympathy allowance”. Excessively generous tax breaks for large corporations and large asset holders have led to the large loss in tax revenues. At present, large corporations pay only one-third of the taxes they paid during the bubble economy.

Replacing the previous LDP regime, the DPJ government is also supporting large development projects such as the construction of a beltway project in Tokyo costing 100 million yen a meter. Rather than considering cuts in military expenditures, the government increased the military budget by about 1.6 billion yen this fiscal year. It also leaves the preferential tax measures for large corporations and the wealthy untouched. In fact, it says it will provide further tax relief for large corporations.

If the government really intends to restore fiscal responsibility, it must reveal the true cause of the fiscal deficit before the public.

What is the JCP position?

The Japanese Communist Party points out that it is unnecessary to increase the consumption tax as a means to overcome the serious financial deficit. The JCP is calling for a drastic review in procurement of revenues as well as allotment of expenditures while putting priority on defending people’s living conditions.

In regard to expenditures, the JCP is seeking a one-trillion yen cut in military spending by such means as not giving 337 billion yen to the U.S. military for its own realignment. The JCP is also proposing that the government cancel or postpone large development projects like the construction of a beltway around the city of Tokyo costing 100 million yen a meter, abolish the system of government subsidies amounting to 32 billion yen to political parties, abandon the dangerous plan to activate the fast breeder reactor Monju on which 900 billion yen has already been spent, and use the one trillion yen in the recently-established state reserve funds earmarked to deal with economic crisis and revitalize local economies. These measures will save about four trillion yen per year.

As for sources of revenues, people at present pay 20 percent of interest on their savings while large shareholders pay only 10 percent in the tax on their hundreds of millions of cash dividends. The JCP is suggesting that the preferential securities taxation system be abolished, the dividend tax rate be restored to the original 20 percent, and for the wealthy to pay a 30 percent dividend tax. The JCP is also proposing that the maximum rate for the income tax be 50 percent, inheritance and gift taxes be returned to 70 percent, various tax breaks for large corporations be reviewed, and corporate taxes be gradually returned to the original 40 percent. These measures will create another three or four trillion yen per year.

The DPJ is calling the elimination of the wasteful use of tax money and conducted budget-screening assessments. However, all it was able to save was less than one trillion yen because it could not dip into the budget allotted to support the U.S. military and large Japanese corporations.

In sharp contrast, the JCP can ensure a savings seven or eight trillion yen per year in the short term and secure 12 trillion yen in the long term.

What the last decade has clearly showed is that the “trickle down” theory that “an increase in corporate profits would trickle down to wage earners and thus boost the economy” is no longer tenable.

The JCP looks to reduce the fiscal deficit step by step each year while securing the budget needed for social security. The JCP demands that large corporations return a portion of their internal reserves of about 229 trillion yen in order to provide jobs and benefit, small- and midsized-businesses, as well as society as a whole. Measures and budgets that attach importance on ordinary people’s living, working, and business conditions will enrich people’s livelihoods, boost domestic demand, contribute to economic recovery, and eventually increase the country’s tax revenues.
- Akahata, June 26, 27, 2010